Bold Energy learns to adapt to changing worlds

Published 10:32 am, Wednesday, June 19, 2013

"The challenge, when the world changes, is making the correct decision," says Joe Castillo, president of Bold Energy II LLC. "You may not know for months afterward if the decision was correct or not."

Castillo and those who helped him found Bold Energy have found themselves facing a changed world more than once since the first Bold Energy was formed in 2005.

When Bold Energy I was formed in 2005, Castillo noted, it was focused on the Morrow and Atoka natural gas-producing formations in Southeast New Mexico, "principally in Lea County and secondarily in Eddy County."

Before pitching the concept to equity firms, he said, he and his fellow founders, David Cox and Peggy Worthington, conducted extensive geological studies of the formations.

"When we went to the equity guys, that was our selling point, that we understood the Morrow," Castillo said. EnCap Investments was willing to take a chance on the fledgling company, and within two years Bold Energy I had grown natural gas production from zero to 16 million cubic feet per day.

EnCap continues to partner with Bold to this day.

Cox, who formed Storm Peak Energy after Bold I, returned to the company and now serves as executive vice president of business development for Bold Energy III. He said he is proud of the team the company has assembled.

Bold Energy, Castillo said, is not in the business of producing oil and natural gas. Its business, he explained, is to build and then sell reserves.

"We can produce or we can sell the future value," he said. "By selling, you're removing future risk."

He continued, "guys like us, we find oil and gas and sell it to companies that produce oil and gas. It's a nice interrelationship between private equity businesses and public companies."

First time world changes

Bold Energy I was sold to Occidental Petroleum in 2008, marking the first time the world changed for Castillo and his partners.

"When we went to market, it was February 2008 and the sales process takes about 60 days," Castillo explained. "In that 60 days, oil and natural gas prices rose dramatically so our timing was perfect. When we closed the sale to Oxy in May 2008, we were able to capture a premium price."

Second time world changes

With the proceeds from the sale of Bold Energy I in hand, plans were being formulated for Bold Energy II. At the time, Castillo noted, the 2008 presidential elections were underway and then-New Mexico Gov. Bill Richardson had sought the Democratic nomination for president.

"We saw what we perceived was the beginnings of a more onerous regulatory environment," he observed. "In particular, what we saw was a change in how drilling was being done in New Mexico, particularly on Bureau of Land Management and state lands."

He pointed to changes in how drilling cuttings and muds were to be disposed. So, he said, "we decided to take a sabbatical from Southeast New Mexico and let the big guys figure it out." While he stressed the company would be happy to resume activity in New Mexico, "we came back to Texas and the world changed in a matter of months."

That change was the beginnings of the Great Recession, he said.

"By the time we figured out what we wanted to do, oil prices had peaked at $147 a barrel and natural gas prices had peaked at $15 an Mcf. The industry was on fire," he recalled.

Within a couple of weeks of opening its doors, Bold Energy II had assembled 18,000 acres in Irion County and scheduled a well planning to focus on Canyon gas production. Castillo noted that it had taken from June to November to get a drilling rig.

"Within months, oil prices had plummeted from $137 to $52 and natural gas followed a similar trajectory, falling from $12 per Mcf to $4 per Mcf," he said. By early in the first quarter of 2009, oil prices were $35 and natural gas was below $4 per Mcf.

"We found ourselves with acreage in Irion County we couldn't drill," Castillo said. "So we shifted gears."

They decided, he said, that natural gas prices were not going to recover "any time soon" but that oil prices had been oversold.

"We decided to shift from natural gas to oil so we began looking for partners and we found one in EOG Resources, "which bought 80 percent of Bold's Irion County position and put together a horizontal Wolfcamp drilling program, which he said took him and his partners by surprise.

They took the proceeds from EOG's purchase and began looking for "inexpensive vertical drilling for oil reserve" opportunities in the Central Basin Platform. They also pursued opportunities in the Avalon and Bone Spring formations in the Delaware Basin, acquiring 12,000 acres in Loving and Reeves counties.

The acreage in Loving and Reeves counties were sold to Petrohawk and in December of 2012, Bold Energy II sold its Central Basin Platform assets to Lime Rock Resources.

Third time world changes

In keeping with its practice of adapting to changing worlds, Castillo said Bold Energy III's objectives will be different from Bold Energy II, which were different from Bold Energy I.

Impressed with EOG's results from its horizontal drilling program in Irion County, he said Bold Energy III, which opened its doors April 1, will focus on horizontal drilling.

"We decided that, if we're going to make a meaningful venture in Bold Energy III, we needed an opportunity to drill horizontally," he explained. "If you go back three years ago, the percentage of rigs drilling horizontal wells in the Permian Basin was 15 to 18 percent. Today, more than 45 percent of the rigs are drilling horizontal wells. Within three years, the percentage of horizontal rigs has more than doubled."

He said the belief is horizontal drilling will come to dominate Permian Basin drilling activity.

"All the $25 oil has been found, but there's a ton of $90 or $100 or $150 oil waiting to be produced. Horizontal drilling has unlocked the key to economically producing those reserves."

The company's challenge, Castillo continued, will be to develop horizontal expertise and compete with big companies who are already developing the expertise.

"One of the great things about this industry and the people in the industry is you can always find people who want to be entrepreneurs," he said. "It takes stepping away from a steady paycheck to work for a company you have no idea will be around next week. It's a leap of faith, but it's a leap of faith in your own capabilities."

In developing its horizontal strategy, Castillo said Bold III went after people with horizontal expertise in geologic, drilling and operations and reservoir engineering aspects. The company has added Robert Soza as drilling-completion manager, Barney Thompson as drilling superintendent, Teri McGuigan as land manager, Lenny Wood as exploration manager and Tom McCray as reservoir engineering manager. McGuigan has experience with ConocoPhillips and Endeavor Energy Resources while Soza, Thompson, Wood and McCray were heavily involved in EOG's horizontal Wolfcamp play on the Eastern Shelf.

"We offered them not ridiculous salaries but the opportunity to be entrepreneurs," Castillo said. "Surprisingly that attracted them."

He called the new addition a tremendous complement to the team already in place.

The company is seeking acreage already containing proven reserves. While it has no definitive plans, "we have a lot of irons in the fire."

In the Permian Basin, Castillo said, "existing properties have become very valuable, particularly if you believe the advent of new technology will unlock reserves that haven't been contemplated yet."

The plan is to partner with the existing owners of properties, he said, who wonder how to attract horizontal drilling to their acreage. They offer the acreage while Bold will bring its expertise and willingness to risk capital. It's a win-win situation, he said, with both parties seeing increases in value.

With work beginning to build Bold Energy III, Castillo is facing the future with some confidence.

"For the most part, we've had stable oil prices for the last two years at $80 to $100 a barrel. With that kind of stability, people feel good about the risks going forward. We can see that in the rig count, which has been stable the last two years. That stability is what the industry craves."

He expects Bold Energy III to follow the standard timeline of three to five years, probably closer to five years given the time it takes for horizontal drilling to yield results.

"The main thing for us is we enjoy the game," he said. "There's nothing better than getting people together and solving problems, from geologic challenges to operational situations. There's tremendous satisfaction when you team up and bring your individual expertise to solve problems. You can't be afraid to fail and you have to accept failure. What separate winners from losers is winners don't quit. You solve the problem and use that experience to help avoid problems in the future."